The Tax Battalion

In a couple weeks the Franchise Tax Board (FTB) will be submitting its “Top 500” list to state licensing agencies, including the DMV. The FTB Top 500, if you recall, is a list of California taxpayers with the most serious state tax debts. If you make the list then you could lose your drivers license, occupational license, professional license. You may also be precluded from entering into contracts with the state.

The Top 500 now lists applicable licensing agencies, license statuses (i.e., active, canceled, disbarred) and license numbers. A good chunk of these delinquencies are for corporate taxes, and the corporate income tax chart lists officers by name.

The list is meant to increase voluntary compliance in hopes of closing California’s $10 billion tax gap. This may be an effective deterrent for individuals concerned with their image and their integrity, but how effective is the public shaming of a defunct corporation? I suspect that many of the corporate tax debts are associated with corporations that are no longer operating, and who knows how much the FTB will be able to collect on a bunch of closed corporations.

But what happens when a federal agency owes taxes? According to the Treasury Inspector General for Tax Administration (TIGTA), not enough. Back in 2007 TIGTA made some recommendations that might improve oversight of these special tax accounts and improve compliance. TIGTA basically recommended that the IRS figure out why this is happening and how to make it stop.

It’s 5 years later and the IRS still does not have an adequate process for resolving aged federal agency tax cases. As of December 31, 2011 there were 70 federal agencies with delinquent tax accounts totalling $14 million in unpaid taxes. What’s worse is that 34 of these accounts were placed in Currently Not Collectible status because they could not pay. But the IRS has been known to actually shut down private businesses that demonstrate an inability to pay employment taxes. TIGTA admits to this double standard in its latest audit report.

There are actually 8 taxpayer rights, but the first one is a complete farce. The first is entitled “Protection of Your Rights” in Pub 1, and it is described as follows:

IRS employees will explain and protect your rights as a taxpayer throughout your contact with us.

If that were really true then you would not need right #3 — you would never need a tax attorney — because the IRS would have your back every step of the way. You wouldn’t need right #5 because there would be no unresolved tax problems. And you wouldn’t need rights #6 or #7 because the IRS would always get it right the first time.

The truth is the IRS’ top priority is to collect 100% of the tax due, not protect your rights. And they will make this abundantly clear throughout your contact with them. That’s why the most important right is to have professional representation — just as tax relief is not automatic, your taxpayer rights are not self-enforcing.

Let’s look back on some of the statistics compiled by the IRS for Fiscal Year 2011 and try to determine what will be reported for FY 2012. Will we see any new tax relief trends? My source is the Statistics of Income tax stats found in the “IRS Data Book.”

Number of new deliquent tax accounts in FY 2011: 8,011,000 (17,000 more than 2010)

Number of untimely filed returns by end of FY 2011: 3,862,000 (162,000 more than 2010)

Number of Offers in Compromise filed: 59,000 (2,000 more than 2010)

Number of Offers in Compromise accepted: 20,000 (6,000 more than 2010)

Number of Federal Tax Liens filed: 1,042,230 (54,146 less than 2010)

Number of levy notices served on 3rd parties: 3,748,884 (142,066 more than 2010)

Number of seizures: 776 (171 more than 2010)

The only stat that appears to be on a downward trend is the filing of Federal Tax Liens. This is good news for taxpayers. For several years now advocacy groups have been questioning the efficacy of tax liens as a collections tool; maybe the IRS is finally listening.

More and more taxpayers continue to file and pay late, and incur tax debt. And the IRS tries to keep pace by increasing active collection activities.

What about the Offer in Compromise acceptance rate? You see a lot of percentages thrown around by tax attorneys and tax resolution firms. But according to IRS’ figures, they accepted 25% in 2010 and 34% in 2011. This is probably the most encouraging data of all. Let’s hope this trend continues and the IRS accepts event more offers in compromise when the statistics are available for FY 2012.

Most people, including some IRS personnel, call it an EIN number. But the “N” in the acronym stands for “Number,” so it should be referred to simply as an “EIN,” unless you mean to say “Employer Identification Number Number,” which is just silly.

The EIN is a federal tax identification number used by the IRS to identify most businesses. An EIN number is generally tied to a social security number so that if a tax debt is incurred, the IRS can track down a “responsible party” for payment. If your business is not considered a separate entity for tax purposes and you will only be required to file an individual 1040 tax return, such as in the case of a sole proprietorship, you do not need an EIN. However, if any of the following factors apply to you, then an EIN is needed:

You have employees

Your business is a partnership or corporation

You are required to file employment tax returns

You are required to file excise tax returns

You are required to file alcohol, tobacco and firearms returns

You withhold taxes on income, other than wages, paid to a non-resident alien

You do not need a tax attorney to help you apply for an EIN — it is easy and free. The best way to obtain an EIN is to apply online. But you may also apply by fax, phone, or mail if you insist on doing it the hard way.

A multimillion dollar tax refund fraud scheme was dismantled by authorities recently, but not after the IRS paid out over $5 million in refunds based on claims made using stolen identities from citizens of Puerto Rico. “Operation Mass Mail” finally resulted in a Complaint naming five defendants which was unsealed earlier this week. IRS Criminal Investigation (IRS-CI) is normally assisted by other federal agencies in tax fraud investigations; this time the US Attorney and the US Postal Inspection Service.

The scheme operated more or less in this manner (allegedly):

Jose Angel Quilestorres got things started from his apartment in the Bronx, filing false returns using stolen taxpayer information

Refunds were received at multiple locations; some were intercepted by US Postal Service workers who accepted bribes to assist in the fraud

The refund checks then changed hands again and were cashed by the other four defendants named in the Complaint

The leader of this operation, Quilestorres, faces a maximum of 32 years behind bars.

The tax problems of the Average Joe pale in comparison. How can the IRS find time to pursue criminal charges against people who simply fail to file tax returns (even if they pile up a big tax debt) when things like this are going on around us? Sure, they do find time on occasion, but they have bigger fish to fry.

Hundreds of defiant pastors will be joining forces next month for “Pulpit Freedom Sunday,” an event intended as a “head-on constitutional challenge” to the rules prohibiting churches from endorsing or opposing political candidates. Participation has grown every year since 2008 when the movement began. Pastors participating in this October 7th event will be speaking unequivocally for and/or against specific presidential candidates, risking revocation of their 501(c)(3) tax-exempt status. A risk they welcome, apparently. They will be recording each sermon and sending it in a care package to the IRS. They are hoping the IRS takes action against one or all of the pastors so they can then litigate and (eventually) take it all the way up to the Supreme Court.

I’m not sure churches will have a leg to stand on in challenging the constitutionality of this 58-year-old tax code provision. It would be one thing if the federal government were unilaterally restricting what church representatives can and cannot say over the pulpit, but what about the tax relief offered to non-profit organizations!? Its a dual tax subsidy for churches: (1) their income is not taxed, and (2) donations to them are tax-deductible.

Sounds like a fun event though — a real American kind of thing to do. Constitutional law lawyer, tax lawyer, and interested citizen alike will be watching to see how the IRS responds.

I was sad to learn that the Danish government is second guessing the “fat tax” that just made it on the books last October. They are finding that Danes are crossing the border for tax relief. They are crossing into neighboring countries (Germany, Holland, or Sweden) to make their high-fat food purchases, which is causing serious financial harm to Danish businesses. I guess this means the Danes won’t be taxing foods with high sugar content either as they had planned to do previously. They had such high hopes only a year ago.

The issue of whether or not “sin taxes” produce the desired effect is a hot one; experts do not agree. Denmark certainly would have been an interesting test case. But repealing the fat tax after only one year isn’t going to tell us anything definitive. I won’t lie, it was also kind of nice that we were able to observe how this might have played out from a distance (without subjecting ourselves to such an awful tax). The tax attorneys at our firm are united in our steadfast opposition to any tax that would make junk food more expensive.

taxpayer responds by providing documentation that substantiates the figures on the original return

the IRS then closes the case without making changes to the return, OR

the IRS sends another letter asking for additional supporting documentation, OR

the IRS proposes a tax change based on the information received

If the taxpayer disagrees with a tax change, he/she may appeal the decision. It is called a correspondence audit because it does not involve an IRS auditor banging on your front door.

Taxpayers naturally want to know what is going on with their case; whether or not their documents have been received, whether or not the documents they submitted are sufficient, ultimately whether or not their tax problem has been resolved. And in the past, the IRS has been slow to answer these questions.

But recently the IRS has made efforts to improve the correspondence audit process by something called the “Intelligent Contact Management System.” See TIGTA report. ICMS allows taxpayers to speak directly with IRS audit representatives rather than leave messages (under the old system) that were not being returned. However, even though taxpayers may be getting through to live operators and getting answers these days, the answer is still “not yet.” The audit process is still as slow as ever. TIGTA confirms in their report that ICMS will not do anything to actually shorten the correspondence audit process.

On a side note, it’s slightly presumptuous for the IRS to use the word “intelligent” in the name of one of its systems, dontcha think?

The Treasury Inspector General for Tax Administration (TIGTA) recently published a report expressing concern over the submission of tax account transcripts to tax professionals through E-services. The concern is that confidential tax records are being sent without proper authorization.

Proper authorization normally means the signing of a Form 2848 Power of Attorney (POA). When this form is submitted to the IRS by mail or by fax, the “CAF Unit” reviews the form for accuracy and completeness and updates IRS computers accordingly. Then, when the tax professional (tax attorney, CPA, enrolled agent) contacts the IRS, they may obtain access to the taxpayer’s tax account and they may request tax account records either by phone, by fax, or online through E-services.

However, some tax professionals are authorized to submit Form 2848 electronically through IRS’ E-services. Electronic POA processing works differently, in that the tax professional is able to gain immediate access to sensitive tax records without human verification that the Form 2848 has been completed correctly. TIGTA’s concern in this audit was that some tax professionals may be submitting a “preliminary” or incomplete Form 2848 as a way to handle their most pressing tax problems immediately and then getting the required signatures afterwards. Or worse, some may be failing to secure a fully-executed POA at any point during the representation.

Of course, TIGTA did test this hypothesis using its customary small sample size, so we don’t really know how big of a problem this really is. Also, we don’t know if the problem extends to the tax relief community or if it is limited to tax preparation. But any breach in the process that could result in unauthorized disclosure of tax information should be taken seriously.

Attorney Advertisement. Tax Attorneys Montgomery & Wetenkamp are licensed by the State Bar of California, are licensed attorneys authorized to practice before the United States Tax Court, and may practice before the Internal Revenue Service (IRS) as attorneys in all 50 states. Sacramento Tax Attorneys and Modesto Tax Attorneys Montgomery & Wetenkamp perform all services in Sacramento, California and Modesto, California. The content of this website is for informational purposes only and does not constitute legal advice. The tax information contained on this website, is not intended to be used, and cannot be used, referred to or relied upon, for the purpose of avoiding tax-related penalties under the Internal Revenue Code or promoting, marketing, or recommending to another party any tax-related transaction or matter addressed herein. Past successes cannot be an assurance of future successes because each case must be decided on its own merits and will differ if based on different facts. Full disclaimer provided on our disclaimer page and is incorporated herein by reference.

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